Correction to Mankiw: Economists Actually Agree, Just Because You Call Something "Free Trade" Doesn't Make It Free Trade (see correction)

Greg Mankiw joined the parade of prominent people saying silly things to help push fast-track trade authority through Congress. He headlined a column:

"Economists actually agree on this point: The Wisdom of Free Trade."

The piece then goes on to argue for fast-track trade authority to allow for the passage of the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP).

It's nice that Mankiw has apparently gotten out his bag of economist's holy water and blessed them both as free trade agreements, but that doesn't make it true. (Hey, I want to have the Congress Gives $1 Trillion to Dean Baker Free Trade Act. As an economist in good standing, Mankiw will have to support this free trade measure.)

The basic story here is a very simple one. There are merits to reducing trade barriers, but traditional trade deals will have winners and losers. If this is hard to understand, imagine that we had a free trade deal in physicians' services so that a flood of foreign doctors cut the pay of doctors by 50 percent (@$125,000 a year on average). This would make most of us winners, since we will pay less for health care, but doctors would be big losers. Most traditional trade deals have this character. So people, including economist people, may reasonably oppose them if they think the losers will be hurt so much that it offsets the gains from the deal. (Yes, we can do redistribution, but that is a children's story. We don't.)

But the key point here is that neither the TPP or TTIP is a traditional trade deal. The formal trade barriers between the parties to these deals are already low, which means there is not much room to lower them further. These deals are mostly about putting in place a business friendly structure of regulation. Some of this business friendly regulation involves increasing barriers in the form of stronger and longer patent and copyright protection. (Yes, that is "protection," as in protectionism.)

It is entirely possible that the higher prices associated with this additional protectionism will more than offset any gains associated with the reduction in the other trade barriers in these pacts. Without having the details on the final agreements (which do not yet exist) there is no way of knowing. We do know that patent protection causes people to pursue patent rents (that is the point), which can often have serious negative consequences, like when drug companies conceal evidence about the dangers of their drugs.

People are also rightly concerned that these trade deals could jeopardize environmental regulation, consumer safety regulation, and financial regulation. The promise from politicians not to worry should be taken about as seriously as any other promise from politicians. And remember, it is not the intentions of the individuals negotiating the deal that will matter in the future. We will have a set of extra-judicial tribunals that will provide the enforcement mechanism for these deals. Can anyone promise us that we will never see an Antonin Scalia clone of one of these tribunals?

There is one other big point which in Mankiw's piece which needs correcting. Mankiw tells readers:

"Politicians and pundits often recoil at imports because they destroy domestic jobs, while they applaud exports because they create jobs.Economists respond that full employment is possible with any pattern of trade.

"The main issue is not the number of jobs, but which jobs."

Mankiw probably missed it, but we had a really bad recession when the housing bubble collapsed in 2007-2009 and the labor market still has not fully recovered. Millions of people are still unemployed or have given up looking for work. Tens of millions are unable to get wage gains because of the continuing weakness of the labor market.

In principle we could get back to full employment with large government budget deficits, but that is not going to happen for political reasons. Aggressive use of work sharing leading to shorter workweeks can also move us toward full employment, but this is also not something we are likely to see any time soon.

This means that if we want to get back to full employment, we have to reduce our $500 billion (@ 3 percent of GDP) trade deficit. (This is the intro econ on which all economists agree. It can even be found in Mankiw's textbook.) Reducing the trade deficit means taking steps to lower the value of the dollar against other currencies. These trade agreements would be the obvious place to have currency rules. If we don't address the currency issue here, where exactly are we going to do it?

Finally, Mankiw has been more than a little sloppy in his all economists agree proclamation. Among the opponents of these deals he would find Nobel Prize winning economist Joe Stiglitz and Nobel Prize winning economist Paul Krugman.

So Mankiw gets a few things wrong, but I agree that we should all support the Congress Gives $1 Trillion to Dean Baker Free Trade Act.

Correction: An earlier version of this post indicated that Fred Bergsten opposed the TPP. He has informed me that this is not the case.